Sky-high protectionism? by Jean Pisani-Ferry*

BRUSSELS -- A new controversy has emerged between the European Union and several of its main trade partners since the EU decided to include in its CO2 emission-control scheme all flights to and from its territory, including transcontinental flights. Airlines will need to acquire emission permits for their flights’ CO2 emissions.

China and the United States are outraged. Chinese airlines have delayed orders to purchase European aircraft. The CEOs of aircraft manufacturer Airbus and major European airlines have urged European leaders to step in. There is talk of a new trade war.

This is an important quarrel, because it is the first real clash in the debate on climate and trade. Not only are the motivations and arguments new, but suspicions about hidden agendas matter as much as substance.

It may seem strange, but the EU sees itself as a soldier of the common good. Why is a group of countries whose share in worldwide CO2 emissions is only 12 percent -- and set to decline fast -- aspiring to global leadership on the issue, despite US inaction and emerging-market countries’ reluctance to commit to binding emission-reduction targets?

In part, the EU’s stance reflects the preferences of European public opinion. In part, it arises from internal politics: To press ahead with its agenda enables the EU to strengthen its hand vis-à-vis the member states. In part, there is the hope that by moving fast, Europe will acquire a comparative advantage in low-carbon technologies.

From a European standpoint, the reaction from trade partners is difficult to accept. After all, the measure is non-discriminatory: All airlines are treated in the same way. In its absence, the choice would have been between putting European airlines at a disadvantage and exempting a sector whose share in the EU’s total CO2 emissions has grown from 1.8 percent in 1990 to 3.5 percent in 2007. Anyone who acknowledges that global warming is a real threat must take the EU’s arguments seriously.

The EU’s trade partners make several valid arguments. One is that receipts from the sale of emission permits should not accrue to the EU for flights that take place largely outside of its borders, though this would be a relatively simple matter for negotiators to settle.

Another argument is that the EU scheme will create distortions that favor incumbents (who will be given permits for free) and non-direct flights (because only the leg to or from the EU will be taxed). This, too, is correct, but the distortion would be eliminated should partner countries adopt the same scheme.

Finally, opponents of the EU’s scheme contend that developing countries’ contribution to emission reductions should be less significant than that of advanced countries, since they contributed much less to the stock of existing greenhouse gases. But this issue could easily be resolved through negotiations over the allocation of permits. In fact, the EU explicitly supports a global agreement, negotiated in a multilateral framework, as the best solution.

The really important argument against Europe’s decision is the one about hidden agendas. The EU’s trade partners do not want to give ground, because they suspect that in the coming years, climate change will serve as a pretext for protectionist policies. Indeed, climate change is in many ways the perfect crutch that opponents of open trade have long sought, and there is a real risk that it will be used in a mischievous way.

So caution is fully justified. But the problems arising from the incoherence of national climate policies are real. They emerge as soon as domestic emissions are taxed in some part of the world (or, equivalently, as soon as quotas are imposed), because domestic producers then claim that they are at a disadvantage in international trade.

Moreover, rejecting Europe’s arguments out of hand, owing to a suspected protectionist agenda, is not without risk. If the controversy comes to be perceived by the European public as a conflict between free trade and the environment, free trade is likely to lose.

Europe’s partners should not assume that trade automatically takes precedence over climate concerns. Instead, they should focus public attention on valid arguments. For example, it is much easier for advanced countries to reduce emissions without any effort, simply by outsourcing the production of emission-intensive goods to emerging and developing countries. In this way, they can meet strict targets without reducing the carbon content of their consumption.

The trade vs. climate debate is fundamental for the global economy. Europe’s air-transport tax provides an opportunity to launch it in a concrete and rational way. It is an opportunity that should not be missed.